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Gas Market Outlook

Why America’s bridge fuel faces a road block.

Fortnightly Magazine - April 2010

development. Ventyx estimates that since 2005 approximately 80 GW of planned coal-fired power generation capacity was cancelled compared to only 6.5 GW of coal-fired capacity additions. While the regulatory and permitting process has been brutal for new coal plants, there are approximately 4 GW of coal-fired power generation capacity additions currently under construction and expected to come online through 2011. However, the longer-term outlook is less clear.

Ventyx currently assumes that major federal environmental legislation will be passed that will include a national RPS goal of 15-percent renewable energy by 2020 and require power sector CO 2 reductions in the range of those outlined in the Waxman-Markey legislation passed by the House in mid-2009. The increasing carbon reduction requirements under such a scenario and the resulting CO 2 allowance prices would drive an increasing number of coal plant retirements. However, carbon capture and sequestration (CCS) likely will become commercially feasible around 2020, and through a combination of retirements and retrofits the coal fleet will begin to transform over the 2020 through 2030 time period.

The resulting Ventyx forecast of U.S. power sector demand for coal and natural gas produced varied predictions. Coal consumption will decline as retirements increase around 2020 and despite the assumption of CCS availability, coal demand will be relatively flat after 2025. In contrast, power sector natural gas consumption essentially will be flat through 2020 during the build up of renewable energy to the 2020 RPS goal, but natural gas demand will increase rapidly after that point.

As with any forecast there are uncertainties and alternative assumptions that would alter the forecast results. The near-term outlook for gas demand could be understated if the current push for renewable energy fades. Without a national RPS, renewable energy additions are likely to slow compared to our forecast, and natural gas-fired generation likely would increase. The long-term outlook for gas demand also might be understated, since there’s no guarantee that research and investment to make CCS commercially viable will come to fruition.

The projections above highlight the challenges for natural gas producers: For the next 10 years natural gas demand growth looks weak due to the renewables push and difficulty in dislodging coal-fired power plants without a substantial increase in the price of carbon emissions. For the gas producers that have invested billions to gain premier positions in emerging shale gas plays throughout North America, tepid demand growth over the next decade will make for lean times and potentially affect the level of future investment. Producers focused on higher cost conventional gas production might find their days numbered.

Beyond 2020, natural gas demand requirements are more likely to increase and the increases could be substantial. Gas demand in 2030 might be as much as 20 Bcfd higher compared to current levels, assuming carbon restrictions disadvantage coal post-2020 and renewables penetration slows after reaching the 2020 national RPS standard. Based on current rates of shale gas production growth and robust resource estimates of shale gas in North America, it’s plausible to increase production to supply the incremental natural gas required. The challenge for North